Greek deal reached but reforms are necessary

By: Jim Leaviss | 13 Jul 2015

By Jim Leaviss, head of Retail Fixed Interest, M&G Investments

The news that a Greek deal is now likely is good for the stability of global capital markets. At a time when global growth has wobbled – in part due to the European situation but also as China slows quickly – it helps reduce the risk that we once again fail to reach escape velocity from the Great Financial Crisis.

We must not take Greek domestic approval for granted. After all this deal goes against much of what Tsipras’s own party believes in, and against what the population overwhelmingly agreed to in the recent referendum. However, it feels likely that we will see the current crisis come to an end, especially if politicians continue to emphasise the growth friendly element of the deal. A bigger question is, of course, how far has the can been kicked down the road?

The deal helps immediate liquidity, but does little to reduce Greece’s debt burden. With a debt to GDP ratio of nearly 180% and without growth, de-levering cannot take place. We will inevitably be back in this same position again within the next few years. The bund is lower on the news, and peripheral bond yields are outperforming as you’d expect.